What to Do About Unemployment in the Caucasus and Central Asia

Judging by growth levels alone, the economies of the Caucasus and Central Asia are doing well. The region’s recovery from the global financial crisis is gaining momentum, with the oil and gas exporters profiting from the high price of oil and the oil and gas importers benefiting from rising export demand and the continued recovery in Russia, which is translating into a steady increase in workers’ remittances.

As elsewhere, uncertainties over the robustness of the global recovery could cloud the region’s growth outlook. Assuming, however, that these external risks do not materialize, we foresee good prospects for the region, with fairly robust growth over the coming year. We are projecting growth in both groups of countries in the range of about 5½ and 6½ percent in 2011 and 2012—as detailed in our latest Regional Economic Outlook: Middle East and Central Asia.

Looking beyond growth rates, however, one challenge that stands out for the region as a whole is to create jobs.

Limited data

It is difficult to determine the extent of unemployment in the region as data are sparse. What is clear, though, is that jobs are lacking throughout the region. This problem is not always evident in the official unemployment figures, which are generally low, especially in Central Asia. But these figures mask the fact that there is a lot of underemployment, particularly in rural areas.

In the south Caucasus, for which more data are available, unofficial estimates point to unemployment rates ranging from 10 percent to as much as 30 percent. In all countries, youth unemployment rates are even higher—close to 15 percent in Azerbaijan, and in the range of 35–40 percent in Georgia and Armenia.

In addition, in several countries in the region—especially Tajikistan and Kyrgyz Republic—the lack of jobs has led many to seek work in other countries, especially Russia. This is an important vulnerability, because if the Russian economy slows down, these workers will return home, adding to poverty and social problems.

Explaining unemployment

Unemployment in the south Caucasus appears to be largely structural in origin—that is, much of it won’t be resolved by a short-term increase in economic activity. The boom period prior to the global financial crisis, for example, did not put much of a dent in these countries’ officially recorded unemployment, nor did the crisis itself lead to a measurable increase for the most part. In contrast, however, in other countries—Tajikistan, for example—the slowdown in Russia did lead to an increase in returning migrants.

The weak association between growth and unemployment observed in the south Caucasus partly reflects the low labor-intensity of growth. During the precrisis boom period, for instance, more jobs were created in financial services than in relatively labor-intensive sectors, such as agriculture.

But the weak link could also reflect other structural factors, most notably a mismatch between the skills provided by national education systems and those demanded by the marketplace. Evidence for this is the tendency for unemployment rates to be highest among the educated. Moreover, more than 20 percent of firms in Armenia and 25 percent of firms in Georgia report “lack of worker skills” as a major constraint to their business operations—fairly significant numbers.

Policy solutions

A good starting point is to develop better labor statistics, which would help policymakers get a firmer grip on the scale and scope of the unemployment problem and, in turn, help them formulate policies to tackle it.

On a basic level, governments in the region could do more to nurture private-sector development, particularly in sectors outside of mining, oil, and gas. Countries in the Caucasus and Central Asia have made important strides in improving the business environment, but many still lag behind on several indicators, especially the ease of trading across borders—in such areas as the number of documents, procedures, and days needed to export and import. And the region’s low scores on several widely cited governance indicators show that these governments still have work to do on eliminating corruption.

All of these policies could form part of a longer-term strategy for attracting investment and creating jobs in the region. Such a plan is vital, because growth alone is not enough.

It is also important to focus on delivering appropriate education to fit the needs of the economy. To that end, improving education systems to better equip young people with the skills demanded by the marketplace would help solve the skills mismatch problem, where it exists.

At the same time, however, while a higher level of skills will lead to improved productivity, the question remains whether this would result in lower unemployment rates. Should scare resources be used to provide labor-market entrants with higher education if there are insufficient high-end jobs to absorb them? Should policymakers, instead, pursue strategies to boost investment in labor-intensive sectors, such as agriculture, to create more jobs?